For advisors changing broker-dealers, financial assistance in the form of forgivable loans is standard procedure for regional broker-dealers and wirehouses, but less common in the independent channel. Wirehouses commonly offer up to 300% of trailing 12 months’ production. In the independent channel, for those firms that even offer forgivable notes, the amounts are typically in the range of 10% to 20% of trailing 12 months’ production.
The new disclosure rule will not apply to incentives totaling less than $50,000. While that figure might look reasonable at first glance, applying a static amount as a guideline fails to differentiate between large and small producers.
For example, in the independent channel, forgivable note money is intended to cover initial transition expenses and potential downtime during the transition (one to three months) of their book of business. A large producer may have 1,000 ACAT transfers, which between qualified and non-qualified accounts can average out at $100 per ACAT transfer. This activity alone equates to a $100,000 expense.
Still not accounted for are registration costs, business cards, stationery, staffing costs for transition paperwork and for those coming from a wirehouse to an independent firm, the added expense of setting up an office. If regulators had even a shred of common sense, they would apply the disclosure rule to a percentage of trailing 12 months’ production with a 30% cap, which would represent a fair percentage to justify coverage of transition expenses and production downtime. Anything above that 30% threshold could be considered more than transition needs and therefore in need of disclosure.